Facebook stock jumps as lockup expires

Nov. 14, 2012
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by Matt Krantz, USA TODAY

by Matt Krantz, USA TODAY

Shares of Facebook (FB) rose sharply Wednesday, surprising some investors, who expected the stock to fall after 777 million more shares were unlocked, allowing employees to sell.

As the end of the trading session approached in New York, Facebook shares ended up 12.6% Wednesday to $22.37 a piece, the highest level since late October.

Facebook's jump out of the gate was not unprecedented. Shares of online review site Yelp rose more than 20% in late August after a lockup because there was less selling than expected.

On Wednesday, employees and other investors in Facebook, the No. 1 social networking company, were allowed to sell up to 777 million more shares. It's customary for companies to "lock up" shares held by early investors and employees for several months after an initial public offering so stock doesn't flood the market as the employees and early investors cash out.

The fact Facebook didn't crash on the first day after the lockup was released doesn't mean the risk is over.

"Not everyone is running for the door, but I suspect more will sell in the coming days or weeks," says Daniel Bradley, professor of finance at the University of South Florida. "Given that the stock price is essentially cut in half from the IPO price, I would think that would prevent some selling that otherwise would have taken place."

Trading in Facebook was heavy Wednesday, with volume of more than 55 million shares in the first 20 minutes of trading. That exceeded the stock's average 52 million daily share volume the past 30 days.

The unexpected rise in the wake of the third, and dramatically largest unlocking of shares, broke a string of large stock losses following these events. Market observers had predicted a rise was unlikely, but possible if the number of employees who actually sold was less than the massive wave expected.

Shares of Facebook fell after smaller numbers of shares were unlocked twice before. Shares dropped 6% to a new low in mid-August and dropped 3% following a share unlock in late October. On average, IPOs tend to fall 2% after share lockups expire, says Jay Ritter professor of finance of the University of Florida.

The fact large institutional buyers like mutual funds have been willing to step up and buy Facebook, especially after the company's better-than-expected earnings report last month, is also putting somewhat of a floor under the shares. In that earnings report, Facebook showed traction in generating revenue from mobile users, a long-standing concern of investors.

Shortly after the May IPO, investors began to question the company's ability to make money from users who access the site from mobile devices. The company's first reported quarter failed to impress as results came in mostly in line.

Facebook's second quarterly report in late October, though, encouraged investors as it topped expectations and showed the company got 14% of revenue from mobile advertising.